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Press Release: IMF and World Bank Support US$3.90 Billion in Debt Service Relief for Zambia

April 8, 2005

The International Monetary Fund (IMF) and theWorld Bank's International Development Association (IDA) have agreed that Zambia has taken the necessary steps to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Debt Initiative. Zambia is the 17th country to reach its completion point under the enhanced framework of the HIPC Debt Initiative, joining Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Tanzania, and Uganda1.

Debt relief under the enhanced HIPC Debt Initiative from all of Zambia's creditors will surpass US$3.9 billion over time (or US$2.5 billion in net present value (NPV) terms as of the end of 1999)2. IDA will provide debt service relief under the enhanced HIPC Debt Initiative amounting to US$885.2 million to be delivered from 2001 through 2020. The IMF will provide debt relief of SDR 468.8 million (equivalent toUS$602 million) in NPV terms on payments falling due to the IMF during 2001-08. The remaining bilateral and multilateral creditors are also expected to provide their share of relief required under the enhanced HIPC Initiative. Zambia qualified under the export criterion and the debt relief was calculated to bring the NPV of debt-to-export ratio down to the HIPC threshold of 150 percent at the decision point. Debt relief, together with bilateral assistance beyond HIPC relief, is estimated to have lowered Zambia's debt-to-export ratio to 174 percent in 2003 and 140 percent in 2004. This ratio is projected to decline steadily thereafter.

Background

In early 2002, Zambia finalized and adopted a full PRSP covering the period 2002-04, which aimed to promote growth and diversification in production and exports, to improve delivery of social services, and to foster appropriate policies for fighting HIV/AIDS, while addressing gender inequality and protecting the environment. In consultation with stakeholders, the period covered by the original PRSP was extended by one year to coincide with Zambia's Transitional National Development Plan (TNDP). A new PRSP will be developed during 2005 alongside a new National Development Plan for the period 2006-2010.

Since the decision point, real GDP growth averaged 4.6 percent a year, marking a turnaround from the decline in per capita income that had prevailed over the previous two decades. Moreover, growth has been fairly broad-based, extending beyond the recovery in the mining sector. However, inflation has remained well above the low single-digit range that was targeted at the decision point, mainly reflecting an initial lack of fiscal support for the programmed lowering of inflation. Meeting the completion point condition, Zambia's performance under the program supported by the IMF's Poverty Reduction and Growth Facility has been satisfactory for 2004. The principal achievement of the authorities' 2004 macroeconomic policy reform programwas a large fiscal adjustment, which reduced domestic borrowing by more than 4 percentage points of GDP from the previous year. Government exercised restraint on its wage bill, which was held to 7.8 percent of GDP, while revenues were strengthened (by 0.5 percent of GDP) and other expenditures were trimmed.

Steps Taken To Reach the Completion Point under the Enhanced HIPC Debt Initiative

Upon reaching the decision point under the enhanced framework of the HIPC Debt Initiative in December 2000, Zambia committed to undertake a series of measures and reforms to reach the completion point. In addition to restoring a stable macroeconomic environment, preparing a full Poverty Reduction Strategy Paper (PRSP) through a participatory process and implementing it for at least one year, the authorities also have:

(i) made progress in combating HIV/AIDS by integrating HIV/AIDS awareness and prevention programs in the pre-service and in-service programs for at least 10 key ministries;

(ii) strengthened basic health services for the poor, including the implementation and scaling up of an action plan for malaria;

(iii) improved availability of and access to education by increasing the starting compensation of teachers in rural arrears; and

In 1996, the World Bank and the IMF launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:

· Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries became eligible for debt relief and some countries became eligible for greater relief.

· Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster.

· Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 27 countries3 - two-thirds of the HIPCs - have reached their "decision points" and are receiving debt relief from all sources that will amount to more than $54 billion over time, and an average NPV stock-of-debt reduction of nearly two-thirds.

1 The completion point under the HIPC Initiative is when creditors commit irrevocably to debt relief. The decision point, which precedes the completion point, is when debt relief is committed and begins on an interim basis.

2 The Net Present Value (NPV) of debt is the discounted sum of all future debt-service obligations (interest and principal). It is a measure that takes into account the degree of concessionality of a country's debt stock. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.